Finance options, focus on PPPs

Finance options, focus on PPPs (PPP=public-private partnership) Dream or a real possibility? Luis Crouch, RTI: lcrouch@rti.org

Stop and discuss • PPPs are mostly about contracts Consider: most human relationships are of one of three types (can mix) • Power – State • Trust, love – Village, family • Contract / partnerships – Market, individuals, relative strangers, voluntary

What makes partnerships work?Just discuss…

When are contractual relationships useful? • Has little to do with inherent importance of the thing being contracted • So, what are factors that make it work? • Specifiability, simplicity, but ultimately specifiability • Hard to cheat: simple to check • Scientific evidence it works • Regular, repeat relationship: help from the village (trust) • Regulatory framework: help from the state (power) • Training of both parties • When not: • When much discretion is needed in acting • When much flexibility is needed • When output hard to specify

Outline • Broadening the base: basic options • Focus on PPPs • A loose definition of PPPs: implications • A tighter definition of PPPs: implications

Options for finance • There are only two basic options: • Go get more money for secondary • Use what you have more efficiently

Go get more money for secondary… • Do you deserve it? • How much do you spend already? Relative to what? • Who would you have to take it from? • The taxpayer or other sub-sectors of education? • Do they spend better (more efficiently) or more justly than you? • Can you convince private actors to pay or lend (parents, communities, business, investors)? (PPPs) • Arguments about “but education is a great investment” are generally weak with Ministries of Finance.

…or spend more efficiently and justly? • If you can’t justify “more money”, then you will most likely be forced to be more efficient or to spend with greater justice (or both) • Sources of possible efficiency and equity gains • There are nine things you can do • Everyone knows them, but here is a reminder list

Nine things you can do to spend more efficiently and with more justice • Lower input prices (*) • Demand more work (1/2 *) • Spend more on right things (**) • Reduce repetition and dropout (**) • Use better technology (***) • Invest in your teachers and train them to be more productive, and get them to teach to standards (****) • Use funding methods that encourage economy, such as formula funding and giving lower levels more discretion (**) • Simplify the curriculum (1/2 *??) • Use the formula funding to target more funding to the poor (systemically, not through special projects) (***)

A “loose” approach to PPPs First, a loose definition: • any relationship between • the state and private agents (parents, schools, business, private producers of educational inputs) • to provide education or education inputs • as long as there is some formal but non-contractual structure to this relationship

Good case studies so skip furtherdiscussion of “looser” form of PPPs

So what is “rigorous” definition? • Probably got most “rigorous” start in UK in early 1990s • Used more in late 1990s, spread mostly to Commonwealth • Mostly oriented at infrastructure and a flow of services from infrastructure • Private sector puts in the up-front finance, construction, and maintenance over time • Public sector makes periodic payments and eventually owns • Terms of contract are well-specified: it is not a matter of favours or loose relationship and loose understandings • Not trust, not power: but contract instead • Mostly predicated around coverage (quantity), or better infrastructure, not quality of education as such

What are pros and cons? • Pros • Allows construction to be brought up in time without government borrowing • Forces a contractual specification of needs and risks that otherwise would not take place within the public sector • Can build in performance incentives • Can allow a risk sharing, since risks are better understood (e.g., occupancy risk) • In some respects not that different from traditional outsourced procurement of works

What are pros and cons? • Cons • Requires active private finance market; hard to do in a very poor country • Hard to specify contracts (this is both a pro and a con) • Public perception of “back-door privatisation” and perceptions that “it would be cheaper to own right away” and “why should government be paying all the time”? (forgets that government would be borrowing from the private sector anyway, if the works are to be done today) • Treasury or MinFin might see it as disguised borrowing (but might see it as more efficient borrowing)

Examples • England, Scotland • Largely oriented at construction • Rigorous contractual base • Has evolved over time • Ireland • Same idea: full range of flow of services: all infrastructural services contractual, no infrastructure worries for Ministry or principals • Sierra Leone • Contracts with NGOs to rebuild after civl war. • Very detailed and supervised contractual relationship • Govt: finances, regulates • NGOs: rehabilitate

Conclusions on “formal” PPPs? • Neither panacea nor big mistake • “It all depends…” • On… • Clarity of framework (SA great example) with partner consensus • Capacity to make contracts generic and large (repeated) versus one-off and small • Capacity of government to specify and monitor contracts • Depth of financial markets and access of private sector to them • Availability of competition amongst providers

Conclusions on “formal” PPPs? • Cost savings often reported • Timeliness also often better • Quality probably no better, though it varies • Because design has to be so well-specified, flexibility might be reduced • Note that the more “partnership” and the more “dialogue,” the more “warm and fuzzy” the relationship becomes, so might lose some of the cost and specificity advantage (but gain flexibility)

Finance options, focus on PPPs